AMC Networks Gets Ahead by Playing “Dead”

We are raising our estimates and lifting the price target of Buy-rated AMC Networks to $75 from $71.

AMC (ticker:
AMCX
) is our 2015 top media pick with company-specific drivers including the launch of new scripted original programming and further development of recent acquisitions (Chellomedia Services and BBC America) driving continued growth in free cash flow. Industry-leading advertising revenue growth, stability in affiliate fees, and a growing mix of owned programming should support relative multiple expansion.

Content success is key to growth and AMC has a bolstered lineup for 2015-2016. Breaking Bad spinoff Better Call Saul debuts Feb. 8 and will lead a foray into Monday-night originals on AMC, while the balance of the year features a mix of new and returning shows (summary within). The pipeline includes a Walking Dead-companion show and a significantly expanded content mix when including BBC America.

We believe consumer behavior will gradually migrate to a program-central rather than channel-centric model, using existing video-on-demand platforms as well as new entrants. AMC continues to grow its core content ownership and we anticipate ongoing growth in related ancillary revenue. However, at less than $1 per subscriber per month we see AMC’s domestic networks as attractively priced for both pay-TV partners or a potential acquirer.

AMC’s carriage agreement with DirecTV (
DTV
) covering 20.2 million domestic subscribers expired at year-end and we believe that the companies are currently negotiating a renewal. We anticipate an agreement before the return of The Walking Dead in February, which we believe would conclude most major distributor renewals for the next several years.

Our new price target reflects 14.3 times our 2016 earnings-per-share estimate of $5.26 (up from $5.19). Our target multiple is a 10% premium to the current S&P 500 multiple on 2016 and reflects our expectation that the market will place greater value on company-specific drivers in the coming year. Our 2016 EPS estimate is 8% ahead of the current consensus estimate.

-- Michael Morris -- Curry Baker

The companies mentioned in Hot Research are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of Barrons.com or Dow Jones & Company, Inc. Share prices at the time the report was issued and the date of the report are in parentheses.

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